Financing Offshore Real Estate

Three Ways To Finance The Purchase Of Real Estate Overseas

It is not possible in much of the world for a foreign buyer to borrow money locally for the purchase of real estate. No bank will lend to you. And, in places where it is possible for a foreigner to borrow locally to buy property, you won’t find the terms as appealing as they can be in the United States.

In the final years of the real estate bubble in Ireland, banks in that country were offering 110% loan-to-value (LTV) financing. The extra 10% was to cover stamp duty (a tax charged of the buyer at the time of purchase in Ireland) and other closing costs. This very aggressive approach to mortgage lending was one of the factors contributing to the collapse of Ireland’s banking industry. It goes without saying that you can’t borrow 110% of the purchase price of a piece of property in Ireland today. In the current global climate, I don’t know any bank in any country offering 110% LTV financing (though some banks in Spain will lend you 100%, as a resident).

In places where you are able to arrange financing overseas, your options as a foreign buyer are limited. Mortgage industries, in countries where they exist, are less sophisticated and less competitive than in the United States. And, in the wake of what the real estate investment world has witnessed over the past six years, they are also very conservative.

Specifically, outside the United States, fixed-rate mortgages are rare, as are 30-year terms. In some European countries, your options can include 5-year fixed and occasionally 10-year fixed rates on 20- or 25-year mortgages, but adjustable-rate loans are the norm. Also typical are loan-to-value ratios of 50% to 80%.

One cost to getting a mortgage overseas that you may not expect can be life insurance. Banks in most countries where you’ll be able to borrow as a foreigner for the purchase of property are going to require you to take out a life insurance policy for the amount of the mortgage (usually a declining balance policy) naming the bank as beneficiary. Foreign banks don’t want to worry about getting paid or foreclosing if you die.

What are your options if you’re interested in purchasing real estate in a market where bank financing is not available to you as a foreign buyer? Here are three:

• Negotiate terms with the seller, be he an individual owner or a developer. Developer financing is more common today in many countries than it has ever been. Developers in developing markets understand that Americans (one of their biggest pools of potential buyers) no longer have access to the ready cash they once had in the form of a second mortgage or line of credit for real estate they own in the United States. In Panama, Nicaragua, Belize, Uruguay, Colombia, Ecuador, and Argentina both developers and private sellers are willing to allow you to stretch out payments over time.

• Look for formal developer financing. This type of financing is not negotiated on a one-off basis but available to all buyers from a developer. Again, this is an increasingly possible option and can require less in the way of a down payment, even (on occasion) zero down.

• Tap your IRA funds. Most IRA custodians don’t allow for “non-traditional” types of investments such as foreign real estate. It’s not that you can’t use your IRA funds to invest in real estate overseas, but often your custodian doesn’t want you to. This is either because he doesn’t want (or understand how) to deal with the required paperwork or, more often, because he makes more money if you invest in one of his preferred investment products.

To buy real estate, foreign or local, with your retirement funds, you can set up what’s called a “self-directed IRA” or “self-directed 401(k).” In theory, this means you’re in a position to “direct” the investment of your account funds. However, you still must go through the custodian, asking him to make the investment for you. He can refuse. Depending on what you want to do, sometimes the only way to take control of your IRA funds is to establish what is sometimes referred to as a “checkbook” IRA.

To do this, you set up an account with a self-directed IRA custodian that allows non-traditional investments. Then you create an LLC (I’d recommend an offshore LLC if your intention is to purchase foreign real estate), in which your IRA invests all its funds. Then you, as the managing member of that LLC, invest the funds of your IRA as you like (keeping in mind that you still have to follow the IRS investment rules, such as no “self-dealing”). This structure allows you to eliminate the paperwork and review process otherwise required each time you invest in something “alternative.” You simply write a check from the LLC’s bank account to make the purchase.

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Kathleen Peddicord has covered the live, retire, and do business overseas beat for more than 30 years and is considered the world's foremost authority on these subjects. She has traveled to more than 75 countries, invested in real estate in 21, established businesses in 7, renovated historic properties in 6, and educated her children in 4.

Kathleen has moved children, staff, enterprises, household goods, and pets across three continents, from the East Coast of the United States to Waterford, Ireland... then to Paris, France... next to Panama City, where she has based her Live and Invest Overseas business. Most recently, Kathleen and her husband Lief Simon are dividing their time between Panama and Paris.

Kathleen was a partner with Agora Publishing’s International Living group for 23 years. In that capacity, she opened her first office overseas, in Waterford, Ireland, where she managed a staff of up to 30 employees for more than 10 years. Kathleen also opened, staffed, and operated International Living publishing and real estate marketing offices in Panama City, Panama; Granada, Nicaragua; Roatan, Honduras; San Miguel de Allende, Mexico; Quito, Ecuador; and Paris, France.

Kathleen moved on from her role with Agora in 2007 and launched her Live and Invest Overseas group in 2008. In the years since, she has built Live and Invest Overseas into a successful, recognized, and respected multi-million-dollar business that employs a staff of 35 in Panama City and dozens of writers and other resources around the world.

Kathleen has been quoted by The New York Times, Money magazine, MSNBC, Yahoo Finance, the AARP, and beyond. She has appeared often on radio and television (including Bloomberg and CNBC) and speaks regularly on topics to do with living, retiring, investing, and doing business around the world.

In addition to her own daily e-letter, the Overseas Opportunity Letter, with a circulation of more than 300,000 readers, Kathleen writes regularly for U.S. News & World Report and Forbes.